We upgrade our recommendation on Millicom International Cellular S.A. (MICC) to Neutral following its solid fourth-quarter 2010 financial results that beats the Zacks Consensus Estimates. Significant growth of 3G mobile and broadband services together with mobile VAS business in Central/South America and Africa will serve as fundamental business catalysts.
Millicom is upgrading its older TDMA and CDMA wireless networks to high-speed 3G wireless capabilities in Latin & Central America. So far the company has 1.7 million 3G subscribers. This is expected to improve the company’s financials in future. At the end of 2010, Millicom had approximately 38.59 million wireless subscribers, up 14% year over year. During the fourth quarter of 2010, Millicom added 1.1 million net new mobile subscribers.
Millicom is expecting a surge of revenue from mobile data services. The company declared that non-voice revenue will constitute over 50% of its total revenue in the core Latin American region within next 5 years from the current level of 23%. Ringtone sales will constitute a major part of this incremental revenue. Additionally, the company started offering mobile financial services in Kenya besides providing cash transfer services in Paraguay, Tanzania and Ghana.
At present, the stock is trading well below the S&P 500 average and the industry average with respect to several valuation metrics. Management has decided to hike the dividend rate by a whopping 28.6% year over year and also authorized an additional $300 million of share repurchase program in 2011. Given the above mentioned positives, we believe Millicom stands to trade at much higher multiple compared with the current level.
Nevertheless, increased competition in the telecom sector of the emerging markets may generate volatile revenue trends. Millicom is giving major thrust in its African operations for future growth. However, Africa is experiencing increased competition. The existing players in the market include global telecom giants such as Vodafone Group plc (VOD), South African MTN, Bharti Airtel, and France Telecom S.A. (FTE).
FRANCE TELE-ADR (FTE): Free Stock Analysis Report
MILLICOM INTL (MICC): Free Stock Analysis Report
VODAFONE GP PLC (VOD): Free Stock Analysis Report
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